The Role of Macroprudential Policy to Manage Exchange Rate Volatility, Excess Banking Liquidity and Credits

Muhammad Edhie Purnawan () and M. Abd. Nasir ()
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Muhammad Edhie Purnawan: Universitas Gadjah Mada
M. Abd. Nasir: University of Jember

Bulletin of Monetary Economics and Banking, 2015, vol. 18, issue 1, 21-44

Abstract: This paper analyzes the macroprudential policy by the central bank to maintain the financial system stability. Using panel data of the government banks, foreign, private, joint venture, and regional development banks during 2004- 2012, we employ Vector Autoregressive Exogenous (VARX) and event analysis method and find that the level of exchange rate volatility decrease after the implementation of the one month holding period, six-month holding period and net open position policies. However, for the nominal exchange rate, these policies are not effective. In aggregate the reserve requirement plus loan to deposit ratio policy is effective to raise the bank credit allocation. Furthermore, the impact of the primary reserve policy is very limited to lower the liquidity of the economy; while at the same time the flow of foreign capital comes into very heavy.

Keywords: macroprudential policy; VARX; event analysis; holding period; net open position; reserve requirement; banking (search for similar items in EconPapers)
JEL-codes: E51 E58 E60 E69 (search for similar items in EconPapers)
Date: 2015
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Persistent link: https://EconPapers.repec.org/RePEc:idn:journl:v:18:y:2015:i:1a:p:21-44

DOI: 10.21098/bemp.v18i1.511

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